FRANKFURT (MNI) – The plan put forth by France for rolling over
Greek debt must not be interpreted as a credit event, European Central
Bank Executive Board member Lorenzo Bini Smaghi warned in a newspaper
interview published Wednesday.

“What is important is the objective of voluntary participation
based on coordination that assures a critical mass,” Bini Smaghi told
the French business daily Les Echos.

The fact that negotiations have begun is a start, he said. “We must
wait to see the results.”

A large number of participating banks is important to encourage
others to come on board, which is difficult since the market for the
debt in question has ceased to function, he explained.

There is no reason why Greek banks should not participate, “like
all the others,” he said.

The French proposition is “interesting, but we must verify that it
is consistent with the framework imposed: no credit event,” he stressed.

Bini Smaghi reminded of the ECB’s procedures for refinancing
operations and its insistence on solvent counterparties with adequate
collateral.

“It is thus not the ECB that has to give assurances” backing a
rollover plan, “but rather the governments that have to assure that the
private sector commit in a voluntary manner to ensure that there is no
credit event,” he said, adding that the ECB Governing Council is
unanimous on this point.

“Greece is not insolvent if it applies the adjustment plan, which
includes in particular numerous privatizations that will be able to
reduce the debt,” Bini Smaghi asserted.

The problem is rather one of market confidence, owing to the need
for corrections to the Greek program as well as to the fear on the part
of investors of a possible restructuring of debt, he said.

“Since mid-October 2010, there has been talk in Europe about the
participation of private creditors as a necessary condition to receive
the support of other European countries, which clearly diverges from
what was done until now in the framework of the IMF,” he said. “If
Europe chose this path, it would demonstrate a masochism without
precedent, by making investors flee.”

Not for the first time, Bini Smaghi warned of the grave
consequences of a Greek debt restructuring, first and foremost for the
country’s own banks and thus economy. He noted in this context the risk
of contagion as well, “starting with Ireland and Portugal.”

With another ECB interest rate hike looming next month, Bini Smaghi
was asked at what level rates would no longer be accommodative. “The
current level, 1.25%, certainly is accommodative in view of a rate of
inflation well above 2% and growth above potential,” he replied. “We
still have a negative real rate of interest, which is difficult to
justify for too long.”

As to the unwinding of special liquidity measures, Bini Smaghi said
that decisions regarding the three-month and weekly operations “must
take into account the general conditions of the markets and the risks of
a subsequent financial shock.”

“We must avoid the risk of introducing more volatility, in
particular with the Euribor, if we move to variable-rate allotments
before having reestablished sufficient stability on the markets,” he
added.

–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com

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